Statistical Methods in Finance 2023

December 19 to 23, 2023



Exploring Alternative Hedging Strategies for Options: A Comparative Analysis of Static and Dynamic Approaches

By Shashi Jain
Indian Institute of Science, Bangalore

The prevalent method of managing market risk for options, dynamic hedging, encounters limitations during sharp market movements or periods of market illiquidity. This presentation explores alternative approaches: static and semi-static hedging strategies for options featuring early exercise. The discussion commences by examining Carr and Wu's semi-static hedging framework, subsequently delving into an extension that offers increased flexibility in selecting short maturity options for hedging purposes. Furthermore, an investigation into a neural network-based approach for static hedging of early exercise options is presented. Finally, empirical performance comparison between a LASSO-based static hedge and the conventional dynamic hedging strategy is discussed, shedding light on their respective efficiencies in risk management.